Greenspan Warns Deficit Could Wreck Economy

The administration’s own Federal Reserve Chairman, Alan Greenspan, warned this week that "The persistence of bloated U.S. trade deficits over time can pose a risk to the U.S. economy." So far, Greenspan said, foreigners have been willing to lend the U.S. money to finance the current account imbalances, but "at some point foreigners might suddenly lose interest in holding dollar-denominated investments. That could cause foreigners to unload investments in U.S. stocks and bonds, sending their prices plunging and interest rates soaring."

MADE IN CHINA: The Bush administration’s inability to pay down the deficit is subjecting America’s economy to the whims of foreign leaders. "Right now, our whole country’s on life-support from Beijing and Tokyo," said Euro Pacific Capital CEO Peter Schiff. As the dollar continues to weaken, Schiff said, "China might decide it’s best to cut us off this welfare scheme and start spending the money on their own citizens." Morgan Stanley economist Stephen Roach adds, "The day will come when foreign investors simply say ‘no’ to this arrangement. That’s when the dollar collapses, US interest rates soar, and the stock market plunges. Under such a crisis scenario, a US recession would be all but inevitable." The Guardian reports the Chinese ? the number one financer of American debt ? are already "losing their appetite for US holdings."

BACK TO THE FUTURE: Some experts insist the current decline of the dollar is "eerily similar to a decline in the 1970s that touched off the worst period of growth the United States experienced since World War II." Then, as now, the dollar declined at a time of "high budget and trade deficits, low interest rates, high oil prices and ever-increasing military spending." By the end of that decade, "the nation was suffering double-digit rates in inflation, mortgages and unemployment."